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James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

Would letting all the Bush tax cuts expire make tax reform easier?

My great pal Tony Fratto over at Hamilton Place Strategies is talking up the “benefits to allowing my favored Bush income tax rates to expire and return to Clinton-era tax rates for everyone.” While emphasizing the Clinton-era tax code is “suboptimal,” Fratto — a deputy press secretary to President George W. Bush — thinks a reversion would make it easier to eventually accomplish major tax reform. Fratto:

The Obama plan of only raising the top two rates on the wealthiest Americans kills any chance of income tax reform. This is important to understand: tax reform was always going to be a long shot. The forces arrayed against reform are numerous, well-organized, well-financed, dispersed across the country, and are often sympathetic groups: charities, state and local governments, the housing industry, and homeowners, just to name a few.

But tax reform becomes practically and politically impossible if the tax burden is skewed to the top as the Obama plan intends. In fact, the wealthiest Americans will face an even higher top marginal tax rate than under the Clinton years due to the increased Medicare payroll and investment taxes in Obamacare. Tax reform requires creating winners, and the pool of winners has to come from people paying taxes. Those not paying taxes today have absolutely nothing to gain from tax reform. In fact, if we only raise the top two rates, the only people who would gain from income tax reform would be the wealthy. And we can’t help the wealthy, so…no tax reform.

The Clinton tax rates create a much better basis for tax reform because more Americans will actually be paying taxes and can benefit from reform.

Now let me see if I understand this clever bit of political strategery. In other words, you have to give a critical mass of voters some skin in the game. By raising middle-class income taxes today, you could then cut them tomorrow as part of reform that would lower tax rates (at least for them) and broaden the tax base to create a more efficient, pro-growth tax code. “Yes, I am scaling back your housing/healthcare/state and local tax break, but I am also lowering your marginal tax rate.”

Now Tony is right that the current makeup of the tax code does make it tough to do CBO-approved, revenue-neutral tax reform, as Mitt Romney found out. But I have some concerns/questions/observations (beyond concerns about a nasty 2013 recession):

1. What if Democrats decide to keep the money with no tax reform? All else equal, letting the Bush tax cuts expire would, according to the CBO, give government a gusher of money, an additional $5.1 trillion over a decade.Tax revenue as a share of GDP would average 20.6% from 2013-2012 vs.18.1% if we keep the Bush tax cuts (or about the post-WWII average).

2. With higher tax revenues, wouldn’t any near- or medium-term pressure to do entitlement reform evaporate? While annual deficits might be lower, the Medicare-Medicaid-Social Security debt bomb would still be ticking, and the longer we wait to act, the more dramatic reform will need to be.

3. If you are looking for middle-class, tax-reform sweetener, what about cutting payroll and investment taxes?

When the taxes are raised, the government will keep the revenue and not lower them in the future (assuming there is extra revenue, a dubious claim at best). Governments are very reluctant to give up any power they have, whether it be legislative or though taxation.

Y’know, there is a little issue I wanted to take up with you. Y’know all that talk you’ve been giving us about “broadening the base,” how so many people don’t pay any Federal taxes??

Well, wasn’t that YOUR idea? I mean, Jim, you must have supported the Hubbard/Mankiw tax policy lock, stock and barrel, and you DID like dropping marginal brackets while retaining all of those deductibles. At least you said so at the time.

And since, as we ALL KNOW THAT LOWER TAXES HAVE AN UNARGUABLY POSITIVE AFFECT ON THE ECONOMY, IRREGARDLESS OF ANY OTHER EXTANT FACTORS, well, Jim, if paying LOWER taxes are good, WHY AREN’T PAYING NO TAXES GOOD or even BETTER?

The way you’ve been telling it, Jim, is that if we have fewer and fewer people paying less and less, we should have a condition of permanent economic prosperity. Isn’t that what the AEI, Heritage, the Club for Growth and all of these other “institutions” have promised us all this time?

But you seem to object to a great mass of people paying no tax at all.

I assume you’ve never heard of a bell curve? Or the concept of “point of diminishing returns?” Otherwise you’d make a more educated argument.

The government requires monetary resources to operate. Without government we have anarchy. Anarchy is bad for the economy. On the other hand too much government and taxes that are too high is also bad for the economy. The trick is to find the point of diminishing returns. We can debate where that point is but leave your straw men and red herrings out of adult conversations please.

1.3 trillion – is REALLY SLIMY in the CONTEXT of the US budget where the GOP folks INCLUDE 283 billion of State budgets that are NOT in the US budget AND they EXCLUDE the entitlements for DOD military.

“1.3 trillion – is REALLY SLIMY in the CONTEXT of the US budget where the GOP folks INCLUDE 283 billion of State budgets that are NOT in the US budget AND they EXCLUDE the entitlements for DOD military“…

This idiotic babble makes no sense at all but then again I’m not suprised…

and try to find 1.3 trillion… what’s there is about 745 billion and includes things like PeLL Grants, Head Start, adoption assistance, persons with disabilities but not DOD VA or health care nor farm or ethanol subsidies nor tax free employer-provided healthcare.

in other words, yet another partisan misrepresentation of the whole truth.

” Budget Committee staff calculated at least an additional $283 billion in state contributions to those same federal programs,[1] for a total annual expenditure of $1.03 trillion”

Now JuanDOZE don’t you think it is a tad dishonest to include state expenditures when talking about the effect that entitlements are having on the US budget at the same time you discount the other National Defense spending including DOD entitlements?

larry g just can’t help himself: “Now JuanDOZE don’t you think it is a tad dishonest to include state expenditures when talking about the effect that entitlements are having on the US budget at the same time you discount the other National Defense spending including DOD entitlements?“…